Labels: Phillip Bennett, Refco

Labels: Joseph Collins, Mayer Brown Rowe and Maw, Refco, Stoneridge

Labels: BAWAG, Fraud, hedge fund, Refco

Labels: Joseph Collins, Phillip Bennett, Refco, Robert Trosten, Santo Maggio, Tone Grant

Labels: Bernstein Litowitz and Berger, class action, Phillip Bennett, Refco

Labels: Refco, Tone Grant

Labels: indictment, Joseph Collins, Mayer Brown Rowe and Maw, Refco

Labels: Mayer Brown Rowe and Maw, Refco

Labels: accounting fraud, boom, Race to the Bottom, Refco

Labels: Joseph Collins, Mayer Brown Rowe and Maw, Refco

Refco was the subject of 142 regulatory actions, the most of any futures trading outfit, according to a Bloomberg News analysis. The Commodity Futures Trading Commission came after it repeatedly, in some of its most prominent administrative cases of the 1980s and 1990s.

Fellow trading executives say Refco flouted industry standards like no other firm, tossing aside the rulebooks, taking on the diciest accounts and fighting back against regulators that tried to intervene.

Refco traces its origins to a one-time poultry wholesaler who served time in prison for selling substandard chickens to the military. Ray Friedman eventually won a pardon and with his stepson, Thomas Dittmer, opened the forerunner of Refco around 1969.

Labels: Fraud, indictment, money laundering, Phillip Bennett, Refco, Tone Grant

Labels: Bernstein Litowitz and Berger, Mayer Brown Rowe and Maw, Refco, Sean Coffey

Labels: Refco

Labels: Phillip Bennett, Refco

Labels: Refco

Labels: Refco

Ex-Refco Brokers Who Allegedly Poached Clients Settle Suit

Joseph Rebello
Dow Jones Newswires
March 22, 2006

A group of former Refco Inc. (RFXCQ) brokers moved to settle a lawsuit that accused them of defecting to a rival firm and poaching Refco's customers as the company was collapsing last October.

The eight brokers, all based in Chicago, pledged to return confidential documents allegedly taken from Refco's flagship business and to restrict the solicitation of former Refco customers, according to a proposed settlement filed with the U.S. Bankruptcy Court in Manhattan.

The lawsuit against the brokers was filed by the court-appointed administrator of Refco's former flagship unit, Refco LLC. It contended the brokers decamped with secret Refco customer lists just days after the company was engulfed by an accounting scandal.

Some of the brokers, the lawsuit said, then began calling Refco customers and urging them to transfer their business to the rival firm, Brewer Futures Group LLC. The pitch consisted of dire warnings about Refco's future, such as "Refco is going under," and "The level of service at Refco will decline. Service will be better at Brewer"...

Labels: Refco

Labels: Refco

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

Labels: Bayou Group, Kroll, Refco

Refco bondholders want access to data

THE ASSOCIATED PRESS
December 6, 2005

WASHINGTON -- An investor group that holds $487.5 million in Refco Inc. bonds asked a judge to grant it direct access to secret information being gathered by a committee of creditors investigating the company's financial collapse.

The group said Refco's official creditors committee, which last week won the right to subpoena a broad array of Refco records, can't be relied upon to decide fairly which creditors should get access to that information. The creditors committee won that right only after promising to limit who gets access to the records...

But the bondholders contended the committee is "hopelessly conflicted" about pursuing the divergent interests of Refco's creditors. Under the circumstances, they said in court papers late Monday, the bondholders can't be sure they'll be kept informed about the investigation. "Any disconnect in receiving information, even for a short period of time, could have serious consequences," they said...

Labels: Refco

Fund investors turn to private investigators

Risk Magazine
November 2005
By Jayne Jung

The recent to turn to private investigators to dig deeper into fund managers and to conduct due diligence

A spate of hedge fund-related scandals in recent months has increased concern among investors about fraud, and is prompting many to turn to private investigators to dig deeper into fund managers and to conduct due diligence. "What's going on with Bayou, Refco and Man Financial makes people nervous. And nervous people call investigators," says Michael Thomas, a partner at Caveat, a Washington DC-based corporate investigation firm...

...Caveat's Thomas says investors' focus is broader than the financial markets when making investment decisions, and with good reason. Something as simple as a driving under the influence of alcohol or drugs charge might cause investors to withdraw cash from a fund manager, he says. Investors don't want there to be any kind of question mark hanging over the integrity, or principles, of a manager.

Labels: Bayou Group, Refco

Refco Buyers, vultures? Matthew Goldstein at TheStreet.com takes a harsh look at the firms that have been circling since Refco's collapse.
Oh and....Bennett plead not guilty.

SEC Probes Firing of Wachovia Analyst...is a bigger scandal waiting to break on this one?

Kroll UK Directors Get Fat-Cash Following Takeover.

NYSE and the NASD joining forces - A new era in self-regulation?

SEC Compliance Office Prepping Hedge Fund Inspection Bootcamp.

Volkswagon hit by claims of sex junkets....sounds uncomfortable.

Labels: Kroll, Milberg Weiss, Refco

Labels: Refco

US watchdog probes CSFB role in Refco

Robert Lea
Evening Standard
November 9, 2005

INVESTMENT bank CSFB is under investigation by the US Securities and Exchange Commission over its role in the doomed float of commodities and futures broker Refco. Refco collapsed last month, just two months after it floated and raised nearly $600m (£345m).

Analysts have predicted that Refco's banking advisers could face claims of up to $200m in the scandal. CSFB was one of three banks that underwrote the Refco flotation. The others were Goldman Sachs and Bank of America. CSFB also handled the $600m sale of Refco junk bonds alongside Bank of America and Deutsche Bank.

New York-based Refco, which also has offices in London, collapsed after it emerged that its former boss, Philip Bennett, had hidden $430m of bad debts at the time of the float.

British-born Bennett was sacked a week before the firm filed for bankruptcy protection. While industry regulators say the collapse of Refco has damaged the derivatives brokerage industry, five bidders have lined up to pick over the broker's carcass, including Man Group, the London-based FTSE 100 hedge fund manager.

Shareholders have already begun legal actions against Refco's advisers including its auditors Grant Thornton. It has emerged that major accountancy firms KPMG and PricewaterhouseCoopers also advised Refco.

Labels: Grant Thornton, KPMG, Refco

Refco Bidder Alaron Has Been Ruled Out of Auction, CEO Says

Ann Saphir
November 9, 2005
Bloomberg

Alaron Trading Corp., one of five bidders to buy assets of bankrupt futures broker Refco Inc., has been ruled out of a bankruptcy auction, Chief Executive Steven Greenberg said in an interview today.

``The bottom line is we're not going to be able to bid,'' said Greenberg. ``We're disappointed.'' Alaron Managing Partner Gary Weber said in an interview that the auction was ``shrouded in mystery.''

Refco is selling assets after filing the 14th-largest bankruptcy in U.S. history following disclosure that former Chief Executive Officer Phillip Bennett hid $430 million of debt.

Labels: Phillip Bennett, Refco

Refco gets 5 bids for some operations

The Associated Press
November 7, 2005

NEW YORK -- Refco Inc., the troubled commodity-brokerage firm, Monday said it received five bids for its U.S., Europe and Asia operations. Friday, after the financial markets closed, Refco said it would not disclose the names of the bidders or any terms.

However, Man Group PLC of Britain said Monday that Man Financial, its brokerage business, has submitted a bid for parts of Refco, which filed for bankruptcy last month amid a scandal involving its former chief executive.

New York-based Refco said it is "extremely pleased" with the number and quality of the bids received and said it will notify qualified bidders by Monday at 5 p.m. The company also said an auction will be held Nov. 9 and the winning bid is expected to be presented to the court at a hearing Nov. 10. Bids for Refco's regulated commodities and futures arm were due Friday at 4 p.m.

The largest known bid was from Refco competitor Interactive Brokers Group LLC, which had offered $858 million. An $828 million rival bid was also expected from a Delaware corporation formed by the Dubai Investment Group and Yucaipa. Original bidder JC Flowers & Co. had dropped its $768 million offer after a U.S. bankruptcy court reduced the deal's break-up fee.

Refco and 23 affiliates filed for bankruptcy protection Oct. 17, after its former chief executive Phillip Bennett was charged with covering up a $430 million debt to the company.

Labels: Phillip Bennett, Refco

PwC dragged into Refco controversy - Big Four firm's US arm advised futures brokerage on financial reporting ahead of collapse

Nicholas Neveling
Accountancy Age
Nov 7, 2005

PwC's US arm has been dragged into the controversy surrounding collapsed futures brokerage Refco after it emerged that the Big Four firm advised it about financial reporting when it changed from a private to public company.

According to the Financial Times PwC advised Refco on accounting issues and preparing more detailed financial statements. Prosecutors and regulators have not spoken to PwC, but Refco's other advisers, including auditors Grant Thornton, are facing shareholder lawsuits.

The FT reports that PwC was appointed in April last year to advise Refco on $600m (£343.2m) debt offering as part of a deal that saw private equity group Thomas H Lee pay $450m for a majority stake in Refco.

PwC is believed to have had one partner and three staff working for Refco. They advised the group on financial reporting and SEC filing requirements for public companies. Refco collapsed last month when CEO Phillip Bennett allegedly used a hedge fund to conceal a $430m debt from investors.

Labels: Grant Thornton, Phillip Bennett, Refco

Man Group in Refco talks

November 1, 2005
Sharecast

Man Group’s brokerage arm admitted today that it has agreed a confidentiality agreement, allowing it access to Refco's financial data. The agreement marks a key step for the Man Financial in agreeing a deal to buy all or parts of the bankrupt company.

Man said it was entering a non disclosure agreement with Refco, which plunged into bankruptcy last month amid a financial scandal after charges were levelled against its former CEO Phillip Bennett.

The fund manager is the latest suitor to access Refco's financial data, which it will use to consider submitting a formal bid, following Interactive Brokers Group last week while TradeLink is also thought to be interested.

Others also thought to be mulling a potential offer are a group consisting of Merrill Lynch, private equity firm Warburg and Susquehanna.

Bids for Refco are due on November 4.

Labels: Phillip Bennett, Refco

Refco debacle widens and now involves Austrian bank

By : Joe Lauria in New York
October 30, 2005
The Business, Online

AUSTRIAN bank BAWAG is set to file lawsuits against Refco, as the widening scandal involving the US futures trader has prompted a former Refco executive to co-operate with US authorities trying to get to the bottom of the affair.

Austrian regulators last week also launched an investigation into the Refco debacle and expect to release a first report in a fortnight on BAWAG’s role in the accounting scandal. BAWAG is Austria’s fourth-largest bank. It was listed as Refco’s biggest creditor in papers filed by Refco in the US bankruptcy court this month. BAWAG is owed E350m ($424m, £238m) by Refco’s former chief executive, Briton Phillip Bennet, as well as E75m by Refco itself.

BAWAG, owned by Austria’s trade unions, is working with a battery of US?lawyers preparing the lawsuits against several targets, the bank said. The main target is Bennett, to whom BAWAG continued to lend money until 9 October, the day he was suspended by Refco. The next day he was arrested and charged with securities fraud and hiding $430m in debt from the company and its shareholders...

...The US probe was given a boost last week when Santo Maggio, president of the Refco Capital Markets unit, agreed to co-operate with the Justice Department and the Securities and Exchange Commission (SEC). Maggio had been put on leave by the Refco board on 10 October, the same day Bennett was arrested. As a Refco insider, Maggio’s participation is expected to help investigators pressure other executives to co-operate as they build their case. A judge last week gave prosecutors only until Monday to get an indictment against Bennet from a Grand Jury. The deadline could be extended.The US investigators have broadened their probe beyond the original charges against Bennett for hiding debt. They are also looking into the connections between Bennett and BAWAG. The SEC is also probing the role played by Grant Thornton, the accounting firm, which had audited Refco’s books. The investment banks that underwrote Refco’s $583m initial public offering (IPO) in August are also under investigation...

Labels: Department of Justice, Grant Thornton, Phillip Bennett, Refco

Refco executive Maggio cooperating in widening inquiry

October 28, 2005
By Kevin Drawbaugh
Reuters, UK

A senior Refco executive who was put on leave earlier this month is cooperating with U.S. authorities in a widening fraud investigation of the futures and commodities broker, a person close to the case said on Thursday.

Santo Maggio, president of the Refco Capital Markets unit, was put on leave by the Refco board on October 10 when it ousted chief executive Phillip Bennett, who has been arrested and charged with hiding $430 million (241 million pounds) of debt from the company and its shareholders.

The Department of Justice and the Securities and Exchange Commission are investigating the matter and are fast moving beyond the charges brought against Bennett in his arrest warrant, said sources familiar with the matter...

...Maggio's agreement to cooperate will allow federal investigators to follow a typical pattern of obtaining information from a cooperating executive that can then be used to pressure other executives and build a case, lawyers said.

The original article appears here.

-- MDT

Labels: Department of Justice, Phillip Bennett, Refco

Bennett's deception -- missed by regulators, Refco's auditors, Thomas Lee Partners and IPO investors -- was discovered at the beginning of October by Peter James, the company's new controller. "I was working late one night and it hit me,'' says James, who started work at Refco on Aug. 3 as the company approached its IPO. "I was a fresh pair of eyes.''

Labels: Refco

Despite the superficial allure of criminal charges against crafty businessmen, I remain skeptical of criminal cases against anyone until I truly understand them, and the post-Enron era of the government playing to the public's resentment of wealthy business executives has only reinfored my skepticism. So, I continue to look for a coherent explanation of the details behind the government's above-described theory of the case against Mr. Bennett...so let's break this down:

RGHI owes money to Refco;

Refco makes loan 1 to the hedge fund;

Then, hedge fund makes loan 2 to RGHI;

Refco then makes loan 3 to RGHI;

RGHI uses the proceeds from loan 3 to pay the hedge fund for loan 2; and

Then the hedge fund uses the proceeds from the loan 2 repayment to repay loan 1 to Refco.

Labels: Enron, Refco

Their anthem, I Go Chop Your Dollar, hugely popular in Lagos, hit the airwaves a few months ago as a CD penned by an artist called Osofia:

419 is just a game, you are the losers, we are the winners. White people are greedy, I can say they are greedy. White men, I will eat your dollars, will take your money and disappear. 419 is just a game, we are the masters, you are the losers.

"...[E]-mail scammers prefer hitting Americans, whom they see as rich and easy to fool. They rationalize the crime by telling themselves there are no real victims: maghas are avaricious and complicit. To them, the scams, called 419 after the Nigerian statute against fraud, are a game. "Nobody feels sorry for the victims," Samuel said. Scammers, he says, "have the belief that white men are stupid and greedy. They say the American guy has a good life. There's this belief that for every dollar they lose, the American government will pay them back in some way."

Labels: Refco

Race for Refco unit: One out, more in

October 25, 2005
By Jenny Anderson
The New York Times

A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees. Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.


NEW YORK A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees.

Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.

Labels: Refco

Labels: Phillip Bennett, Refco

Angry creditors chase missing $1bn given to Refco insiders

Joe Lauria - in New York
October 23, 2005
The Business

THE scandal surrounding Refco, the world’s largest publicly-traded hedge fund, continued to mushroom last week after it was revealed that company insiders pocketed more than $1bn (£560m, E830m) from the firm in the year before declaring what was the fourth largest bankruptcy in US history.

As the multi-pronged government probe widened, competition to buy Refco assets not under bankruptcy protection also intensified. The value of these assets has plunged 45% from $7.5bn to $4.1bn since the scandal erupted.

Hours after declaring bankruptcy last Sunday, Refco signed a tentative agreement to sell its regulated futures brokerage unit to a group of investors led by J. Christopher Flowers, a former Goldman Sachs executive. But on Thursday Interactive Brokers Group, America’s largest independent broker-dealer, topped Flowers with an offer of $768m for the futures unit.

Dubai Investments, the Middle East state’s investment arm, is pushing to buy the entire bankrupt company for $1bn. Calyon Financial, a Refco rival, is also joining the fray. Within days of refco’s bankruptcy dozens of investors, creditors and their attorneys flew to New York to stake their claims in bankruptcy court.

More than 40% of Refco clients have pulled their money out of its regulated futures-trading unit. Refco went public only last August in an initial public offering managed by Goldman Sachs. Refco had been in business for decades before going public, trading foreign currency, US treasuries and commodities, last year for 200,000 clients. Many will now almost certainly take legal action against the company.

It emerged that when Robert Trosten left his post as chief financial officer a year ago he received $45m, according to testimony earlier this year at an arbitration hearing.

Former chairman Phillip Bennett appears to have received $700m from proceeds the company gained from sale of assets to Thomas Lee Partners last year. British-born Bennett was arrested and charged with securities fraud by federal authorities on 12 October. He faces up to 20 years in jail and is being held on $50m bail. Bennett is accused of hiding $430m in debt.

The next day, Refco temporarily shut down Refco Capital Markets, an important unit, because liquidity dried up. Trading was stopped on the New York Stock Exchange at $7.90 a share and Refco’s bonds plunged.

Last Monday, Refco agreed to sell its regulated futures brokerage business to Flowers for $770m in cash or an option to retain a 20% in the company.

On Tuesday, Hubert Gorbach, Austria’s vice-chancellor, asked the central bank to open an investigation into Bawag, an Austrian bank with ties to Bennett. Bawag is listed as Refco’s top creditor in the bankruptcy filing, claiming $451.2m.

Bawag said on Thursday it tried to stop a E350m loan payment to Bennett on 10 October after seeing reports about Refco. But it was too late. Bennett used the Bawag loan to repay some of the debt he owed Refco. He offered Bawag his 34% stake in the company as collateral.

Labels: Phillip Bennett, Refco

Grant Thornton facing huge claims over Refco collapse

By Katherine Griffiths in New York
October 19, 2005
The Independent

Grant Thornton, the international accountancy firm which audited the scandal-ridden futures trader Refco, defended its reputation yesterday in the face of possible multimillion-dollar claims from investors hit by the dramatic collapse of the firm.

Edward Nusbaum, the chief executive of Grant Thornton, admitted that the company would be sued for its involvement in signing off Refco's accounts when it floated on the New York Stock Exchange in August. But he insisted the firm had been misled, just as Refco shareholders had been, by the company's former management.

Refco filed for bankruptcy for two parts of its business yesterday and tentatively agreed to a fire sale of a third part, which trades financial futures, to a consortium led by the private investment group JC Flowers for $768m (£439m). JC Flowers, which is run by Christopher Flowers, a former Goldman Sachs banker, must get the deal approved by a Manhattan bankruptcy court.

The move marks an extraordinarily swift demise for Refco, which revealed last Monday that its chief executive and chairman, Phillip Bennett, was departing after the brokerage found he had covered up millions of dollars of bad debts. Mr Bennett was arrested the following day on criminal charges that he misled investors about the true state of Refco's finances at the time of its flotation.

Grant Thornton took over as Refco's auditor from the defunct accounting giant Arthur Andersen. The firm, as well as Refco's banking underwriters Goldman Sachs, Credit Suisse First Boston and Banc of America Securities, are likely to be the focus of lawsuits brought by shareholders whose investments may be entirely wiped out by the revelations of alleged fraud.

Mr Nusbaum said: "If we had known about the situation before, we would have conducted an investigation and made the implications [known] as it related to the financial statements. Everything we have seen so far indicates we complied with professional standards. Certainly we will be sued. There will be significant legal costs. We believe the cost will be absorbed by the firm."

Lawsuits are being prepared against various parties involved with Refco by heavyweight law firms such as Milberg Weiss and Lerach Coughlin.

In its defence, Grant Thornton will be able to say that it reported two serious deficiencies in Refco's internal financial controls, which were included in the company's IPO prospectus. The auditor noted at the time that there was a shortage of people to prepare Refco's financial statements and a lack of formalised procedures for closing the company's books.

Refco is the latest corporate scandal to engulf Grant Thornton. The Chicago-based firm was also the auditor of Parmalat, which collapsed after an accounting fraud. In the Refco case, the role of Goldman is also being scrutinised because of the number of relationships it has to parties involved in the rapidly evolving situation. As well as being an underwriter in the float, Goldman was hired last week to offer crisis management advice to Refco. Mr Flowers, who emerged as a buyer for Refco's futures arm over the weekend, was a partner at the bank. He has hired Matt Winkelman, formerly joint head of Goldman Sachs fixed-income division, as the new chairman of the futures business.

Mr Flowers said: "I left Goldman Sachs a long time ago and no longer have any association with it." He added that his consortium has an option to buy the rest of Refco. A possible deal will depend on how the Manhattan bankruptcy court divides the company's assets among creditors and investors.

Grant Thornton, the international accountancy firm which audited the scandal-ridden futures trader Refco, defended its reputation yesterday in the face of possible multimillion-dollar claims from investors hit by the dramatic collapse of the firm.

Edward Nusbaum, the chief executive of Grant Thornton, admitted that the company would be sued for its involvement in signing off Refco's accounts when it floated on the New York Stock Exchange in August. But he insisted the firm had been misled, just as Refco shareholders had been, by the company's former management.

Refco filed for bankruptcy for two parts of its business yesterday and tentatively agreed to a fire sale of a third part, which trades financial futures, to a consortium led by the private investment group JC Flowers for $768m (£439m). JC Flowers, which is run by Christopher Flowers, a former Goldman Sachs banker, must get the deal approved by a Manhattan bankruptcy court.

The move marks an extraordinarily swift demise for Refco, which revealed last Monday that its chief executive and chairman, Phillip Bennett, was departing after the brokerage found he had covered up millions of dollars of bad debts. Mr Bennett was arrested the following day on criminal charges that he misled investors about the true state of Refco's finances at the time of its flotation.

Grant Thornton took over as Refco's auditor from the defunct accounting giant Arthur Andersen. The firm, as well as Refco's banking underwriters Goldman Sachs, Credit Suisse First Boston and Banc of America Securities, are likely to be the focus of lawsuits brought by shareholders whose investments may be entirely wiped out by the revelations of alleged fraud.

Mr Nusbaum said: "If we had known about the situation before, we would have conducted an investigation and made the implications [known] as it related to the financial statements. Everything we have seen so far indicates we complied with professional standards. Certainly we will be sued. There will be significant legal costs. We believe the cost will be absorbed by the firm."

Lawsuits are being prepared against various parties involved with Refco by heavyweight law firms such as Milberg Weiss and Lerach Coughlin.

In its defence, Grant Thornton will be able to say that it reported two serious deficiencies in Refco's internal financial controls, which were included in the company's IPO prospectus. The auditor noted at the time that there was a shortage of people to prepare Refco's financial statements and a lack of formalised procedures for closing the company's books.

Refco is the latest corporate scandal to engulf Grant Thornton. The Chicago-based firm was also the auditor of Parmalat, which collapsed after an accounting fraud. In the Refco case, the role of Goldman is also being scrutinised because of the number of relationships it has to parties involved in the rapidly evolving situation. As well as being an underwriter in the float, Goldman was hired last week to offer crisis management advice to Refco. Mr Flowers, who emerged as a buyer for Refco's futures arm over the weekend, was a partner at the bank. He has hired Matt Winkelman, formerly joint head of Goldman Sachs fixed-income division, as the new chairman of the futures business.

Mr Flowers said: "I left Goldman Sachs a long time ago and no longer have any association with it." He added that his consortium has an option to buy the rest of Refco. A possible deal will depend on how the Manhattan bankruptcy court divides the company's assets among creditors and investors.

Labels: Grant Thornton, Parmalat, Phillip Bennett, Refco

Lee could face suits over role in scandal-plagued Refco's IPO

By Steven Syre
Globe Columnist
October 18, 2005

The accounting scandal at futures brokerage Refco Inc. has clobbered lots of investors, none more so than the Thomas H. Lee Co. and its private-equity clients. Here's the simple math for the Lee funds that own 38 percent of the company: Their 48.9 million Refco shares were worth $28.56 each on Oct. 7, just before news of the company's fiasco developed. Those shares last traded five days ago at $7.90. That works out to a decline of just about $1 billion.

But Lee has another Refco stock problem, one with implications that aren't so easy to pencil out. What about the $170 million of Refco stock that Lee funds sold into the market as part of the company's larger initial public offering over the summer? Refco's financial statements, included in documents supporting that IPO, are now disowned by the company itself.

That potential liability won't turn out to be anything like $170 million and does not come close to qualifying as Lee's biggest Refco headache. But it's still a big-ticket issue and poses legal questions that are extremely rare in the world of private equity.

Refco was considered one of Lee's great investing triumphs as recently as two weeks ago. The firm's funds had invested $507 million in Refco to buy a controlling interest in the business just a year ago. The shares Lee sold in the IPO, added to the increased value of the stock it continued to hold, amounted to a fast 200 percent return.

Fortunes changed quickly when Refco discovered a $430 million debt to the company was owed by an entity connected to its chief executive, Phillip Bennett, a fact that appeared to have been obscured by briefly shifting the obligation to a hedge fund client on several timely occasions.

Bennett was suspended and soon charged with securities fraud. He paid back the entire debt a week ago, but Refco warned investors they could not rely on company financial statements dating back three years. Refco shares went into a free fall as the accounting scandal unfolded.

The Refco story has been a gift to securities class-action lawyers, who are sure to press fraud and other claims against Refco and any available deep pocket. Among the likely lawsuits: claims for rescission from owners of Refco shares.

Rescission in the Refco case would require sellers of IPO shares take back the stock at a price identical to that of the initial offering, $22 per share, or nearly three times its most recent trading price.

Investors who bought their shares at the IPO or very soon after the offering -- and continue to hold them -- would have a very strong case for rescission, assuming the company financial statements backing the stock sale turn out to be fraudulent, according to attorneys who specialize in securities law and have no connection to the Refco case.

Those investors would not have to prove that Lee representatives, including four who sat on the Refco board, were aware of the fraudulent financial statements to demand that Lee funds take back the shares they sold into the IPO, the lawyers said.

Here's the catch: How many shareholders really qualify under those standards? The group of investors who bought IPO stock and still own it may be small enough to fit into a phone booth. Refco sold 26.5 million shares in its IPO. Nearly 80 million Refco shares changed hands last week alone.

Investors who have recently purchased Refco stock in the open market could sue the Lee funds as IPO sellers and seek damages. But the securities lawyers said those investors would be required to meet much higher legal standards, and their odds for success would be very remote.

Regardless of Lee's eventual exposure, no private-equity firm wants to be tied up in lawsuits challenging the honesty of an IPO in which it was directly involved. Public stock offerings are a key strategy that private-equity firms use to sell out of investments and return cash to their investors.

Despite the Refco meltdown, Lee funds have produced spectacular returns for investors. Lee funds have returned $6 billion in cash to investors over the past two years and the prime fund that put its money into Refco, Thomas H. Lee Equity Fund V, is generating annual returns over 30 percent, even if that one bad investment is written down to be considered worthless. That fund ranks among the top 10 percent of comparable private-equity portfolios.

The Refco punch hasn't decked Lee's performance. But the headlines this month and the claims in lawsuits to follow leave bruises just the same.

Labels: Phillip Bennett, Refco

"Marino, interviewed Monday outside of Liberty Corner's offices in Summit, N.J., says his client was a prime brokerage customer of Refco and never had any direct dealings with Bennett. His client did not know that Refco Group was a separate company owned by Bennett. In fact, Marino says his client voluntarily called the office of U.S. Attorney Michael Garcia after seeing Liberty Corner's name mentioned in a story last Wednesday in The Wall Street Journal...

...A Mayer Brown spokeswoman, Sheila Turner, described the firm's role in the IPO as limited. Regarding the loans, Turner said Mayer Brown is still gathering information on the matter. "Based on our investigation to date, it appears that lawyers in our firm from time to time documented loans for Refco, and some of these loans appear to have been loans involving Liberty Corner Capital that have now been called into question," Turner said. "At this point in time, we are unable to provide further information..."

...Not everyone is buying Liberty Corner's version of the events. One Wall Street analyst, who didn't want to be identified, says the transaction looks suspicious on its face. Even if Liberty Corner didn't know Bennett controlled Refco Group, the movement of so much cash between two similarly named entities should have set off alarm bells. In fact, investors in the August IPO were on notice that Refco had done at least one prior transaction with Bennett's Refco Group...

For further details on the tangled Refco web, check out the full article at TheStreet.com.

-- MDT

Labels: Phillip Bennett, Refco

Labels: Refco

Bennett's hidden life and frailties of Man

Conal Walsh
Sunday October 16, 2005
The Observer

Events of the past fortnight may have given rueful satisfaction to those who believe the hedge fund industry is an accident waiting to happen. America's Securities and Exchange Commission is probing claims that Man Group helped a client hide $175 million of losses. Separately, and much more seriously, Wall Street kingpin Phillip Bennett is facing fraud charges after allegedly hiding up to $540m in bad debts from investors...

...The demise of such a prominent firm would be a tremendous blow to market sentiment in itself, but others in the industry are already suffering. Refco, which acts as a middleman and counterparty on a host of transactions, has also been forced to freeze customer accounts at its capital markets unit, closing down billions of dollars' worth of deals and potentially threatening instability within the wider hedge fund market.

Even assuming a systemic crisis is averted, the affair could tarnish some august Wall Street reputations. News of the debts has taken Refco itself by surprise, and no mention of them was made when Refco floated just two months ago, raising $583m. There is a likelihood of lawsuits from aggrieved investors against Goldman Sachs, CSFB, and others who advised on the float. Investment banks that arranged Refco's bond issues could also face legal action...

Whatever the case, Bennett's alleged success in hiding the debts raises serious questions about how effectively the world of derivatives trading is being policed. Attention has been drawn to some of the potential risks highlighted in Refco's flotation prospectus, which seem all the more alarming with hindsight - they include 'our lack of formalised procedures for closing our books', and a warning that 'we could be harmed by employee ... misconduct or errors that are difficult to detect and deter'.

The hedge fund industry shrinks from any whiff of scandal - mindful, perhaps, of an epidemic of negative sentiment such as the doomsayers have long predicted. Shares in Man Group, as well as other hedge fund companies, fell last week as Bennett's entirely unconnected troubles started to mount...

Labels: Phillip Bennett, Refco

Labels: Grant Thornton, Parmalat, Phillip Bennett, Refco

Labels: Phillip Bennett, Refco

SEC Looking at Hedge Funds in Stock Placements

By Matthew Goldstein
Senior Writer
October 6, 2005

A long-running investigation into allegations of manipulative trading in the market for private stock placements by small companies is about to heat up. The Securities and Exchange Commission is close to bringing enforcement actions against at least two hedge funds that have been active players in the $14 billion-a-year market for PIPEs, or private investments in public equity, people familiar with the inquiry say.

Within the past few months, the SEC formally notified one of the hedge funds that it is facing potential regulatory action by sending it a so-called Wells Notice. The other hedge fund has yet to receive a Wells Notice, but regulators are close to taking that next step, sources say. The identities of the hedge funds could not be confirmed. But the looming regulatory actions would be the first taken by the SEC against any hedge fund in the nearly 2-year-old inquiry into PIPEs, financing transactions that are often used by cash-strapped companies.

The probe is focusing on allegations of stock manipulation by hedge funds, which tend to be the biggest investors in these shadowy stock sales, and allegations of wrongdoing by the Wall Street firms that round up buyers. PIPEs are popular with hedge funds because the buyers usually get to buy shares at a steep discount to the current market price. Critics contend the ability of a hedge fund to purchase discounted stock makes the PIPEs market ripe for abuse by disreputable short-sellers, traders who place market bets that a stock will decline in price.

Some 18 months ago, the SEC, in conjunction with the NASD, began a broad inquiry into the PIPEs market. Regulators issued subpoenas and requests for documents to 20 brokerages that have arranged the majority of PIPE deals. The SEC issued subpoenas to about 10 hedge funds, several of which are big PIPE investors.

An attorney who represents several hedge funds contacted by regulators says the SEC is "looking at bringing a series of enforcement actions involving big PIPEs players." The attorney, who didn't want to be identified, says none of his hedge fund clients has received a Wells Notice from the SEC. A regulatory source who also did not want to be identified says the "SEC is very interested in this area." The source said he "expects some more cases" in the near future.

One notable hedge fund that has drawn scrutiny from regulators over the past several months is HBK Investments, a big $7 billion Dallas-based hedge fund, sources say. The multistrategy fund is perennially one of the biggest investors in PIPEs. During the first six months of this year, HBK sank $53 million into six different transactions. One particular PIPE deal involving HBK that regulators have looked into is a $3.4 million financing transaction for Plano, Texas outsourcing firm PFSweb (PFSW:Nasdaq) , say people familiar with the deal. HBK was the largest investor in the 2003 financing.

Jon Mosle, HBK's general counsel, declined to comment, noting the hedge fund has a policy of not talking to the press. PFSweb CFO Thomas Madden also declined to comment. To date, most of what is publicly known about the investigation has revolved around a 4-year-old PIPE deal for Compudyne (CDCY:Nasdaq) , a small security services firm. In May, the SEC and the NASD reached a $1.45 million settlement with former hedge fund manager Hilary Shane, charging her with fraud and insider trading. They charged Shane with illegally profiting from a series of short trades she made in Compudyne's stock.

As an investor in the PIPE, regulators say, Shane had advance knowledge that the private placement would price Compudyne's shares at a significant discount to the going market price. And relying on that inside information, the regulators say, she made improper short bets against the company's stock. They also allege Shane used some of the discounted shares she obtained in the PIPE to close out her short positions.

The investigation into the Compudyne transaction also led regulators to pursue a potential enforcement action against Friedman Billings Ramsey (FBR:NYSE) , the investment bank that lined up hedge funds to invest in the PIPE deal. For the past six months, regulators have been involved in settlement negotiations with Friedman Billings and three former executives, including Emanuel Friedman, the firm's co-founder and former co-CEO.

Friedman resigned as CEO in April, just one day before the SEC and NASD formally notified him that he could be charged with "aiding and abetting" insider trading in the Compudyne deal. Friedman Billings, however, isn't the only Wall Street firm to get ensnared in the PIPEs investigation.

This summer, Knight Capital (NITE:Nasdaq) disclosed that its Deephaven asset management group could face potential regulatory action over its trading in a series of PIPE deals from June 1999 through March 2004. Refco (RFX:NYSE) , meanwhile, has set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPE transaction.

Labels: insider trading, PIPES, Refco